May 6, 2008 - US light crude futures traded at just over $120/barrel on May 6 but the message from oil producer group OPEC remains the same: Don't expect us to increase production, because there is no shortage of crude; prices have been rising because of the weak US dollar, speculative activity, insufficient refining capacity and geopolitics.

The 13-member group met in early January and early March and, ignoring pleas from major consuming countries for additional oil, decided to leave official output targets unchanged at 29.673 million b/d for the 12 members bound by output agreements.

Ministers also decided not to meet as they normally do in June, fixing September 9 as the date for the next meeting but stressing their readiness to meet if necessary.

The United States insists that fundamentals are the main cause of the price spike, but other major consumers appear to have some sympathy with OPEC's position.

The International Energy Forum, a talking shop for oil producing and consuming countries, ended its April 20-22 meeting in Rome with a statement reflecting consensus among the more than 90 countries present that current oil prices were a cause for concern.

The statement also said the high prices were increasingly linked to financial market movements. And while it insisted that global oil and gas resources were sufficient to meet world needs over the coming decades, it also warned that the current steep price volatility was blurring market signals and could adversely affect investment in developing capacity to meet future demand.

The Rome meeting had energy security as a main theme. For OPEC, that means security of demand as well as security of supply. As OPEC secretary general Abdalla el-Badri put it to reporters, energy security is "a two-way street."

Badri said OPEC currently held "more than 3 million b/d" of surplus capacity and was still targeting 5 million b/d of new crude production capacity by 2012. He warned, however, that high costs could delay some projects by as much as a year. Costs had risen by between 50% and 60% over the past two or three years, he said.

Two-way Street

Under OPEC's current plans, between 2012 and 2020 members could develop a further 4 million b/d of capacity, but the group has expressed concerns that some of this investment could be wasted if demand from consuming countries turns out to be less than projected.

"If we invest in 9 million b/d [of new capacity] we have to spend $500 billion," Badri said. "Consumers ask for security of supply. That means we have to add capacity," he said. It's a two-way street: security of supply, security of demand."

Ali Naimi, oil minister of OPEC powerhouse Saudi Arabia, told the meeting that even as talk of the world running out of oil raised fears among consumers of supply shortages, "calls for replacing oil with alternative fuels in the name of energy security raises concern among producers that they face a future of diminished demand for a product that provides their main source of income."

Two weeks earlier, Naimi told a Paris conference that Saudi Arabia currently had no plans to develop new capacity beyond the 12.5 million b/d total it will reach by the end of next year because that volume was enough to meet anticipated demand for Saudi crude "for the foreseeable future."

The producers have argued that consuming nations are asking them to add new production capacity while at the same time encouraging a switch to renewable energy sources and other conservation methods. Naimi has contended that subsidies by the US and other OECD nations on ethanol and other biofuels provides alternative fuels with an unfair advantage while eroding demand for fossil fuels. The high cost of producing biofuels has set a floor of $60-$70/b below which oil prices cannot fall without providing any environmental advantages, the Saudi minister has said.

The answer, says Naimi, is for producers and consumers to cooperate in trying to find a way to burn fossil fuels, including coal, more cleanly, thereby guaranteeing a market for the producers and encouraging them to invest in new capacity.

Talk by the US that it wants to lessen dependence on foreign fuel has led Saudi Arabia and other Middle Eastern producers to switch their attention to energy-hungry Asian customers in China and India, where energy demand growth is higher than in the more energy-efficient OECD countries.

Capacity Issues

Given OPEC's history of producing above its ceiling - this applies for nearly all members except perhaps Saudi Arabia and the UAE - the question now is whether they can't or won't produce extra oil. Cynics say that were OPEC's 12 members - excluding Iraq - able to produce more oil, they would be opening up their taps to the limit to take advantage of sky high oil prices.

The International Energy Agency's spare capacity figures and those that OPEC provides do not match. The IEA sees spare capacity currently of 2.2 million b/d, nearly all of it in Saudi Arabia, while OPEC refers to 3 million b/d of spare capacity.

But OPEC's argument that the market is not short of crude oil came to the fore this week when Nigeria lost nearly 1 million b/d of its production due to strikes and sabotage while nearly a third of the UK's North Sea oil was shut in by a refinery strike. Markets moved higher but there was no evidence that markets were so short as to justify a renewed spike in prices. In fact, the opposite happened and prices fell.